Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Illinois Mine Subsidence Insurance Fund v. Union Pacific Railroad Co.

United States District Court, C.D. Illinois, Springfield Division

August 26, 2019

ILLINOIS MINE SUBSIDENCE INSURANCE FUND, Plaintiff,
v.
UNION PACIFIC RAILROAD COMPANY, Defendant.

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

          TOM SCHANZLE-HASKINS, U.S. MAGISTRATE JUDGE.

         This matter came before the Court on February 19, 2019, for a bifurcated bench trial. The Plaintiff Illinois Mine Subsidence Fund (Fund) appeared by its attorneys Todd Schenk and Aon Hussain. The President and CEO of the Fund Heidi Weber also appeared at the trial. The Defendant Union Pacific Railroad Company (Union Pacific) appeared by its attorneys Gary Elden and Riley Mendoza. The parties have consented to proceed before this Court. Consent to the Exercise of Jurisdiction by a United States Magistrate Judge and Reference Order entered August 22, 2018 (d/e 31). For the reasons set forth and detailed below the Court enters judgment in favor of Defendant Union Pacific and against the Plaintiff Fund. The following constitutes the Court's findings of fact and conclusions of law.

         In light of the Court's entry of judgment in favor of Union Pacific, the Court denies as moot Union Pacific's Motion at the Close of Plaintiff's Case for Judgment on Partial Findings (d/e 52), Motion at Trial to Strike Akers Opinion Testimony (d/e 53), and Motion at Trial to Strike Hosfield Opinion Testimony (d/e 54).

         BACKGROUND

         The State of Illinois created the Fund to provide reinsurance for insurers that provide mine subsidence insurance to property owners in Illinois. See 215 ILCS 5/803.1. The statute required insurers to secure subrogation rights from insureds for mine subsidence claims and authorized the Fund to assert such subrogation rights against parties responsible for subsidence damage. 215 ILCS 5/815.1. In 2014, Harold and Tressa Besserman of Macoupin County, Illinois, allegedly suffered mine subsidence damage to their home, a single-family residence. In 2015, Ronald and Cindy Bartolino, also of Macoupin County, Illinois, allegedly suffered mine subsidence damage to their home, a single-family residence. The residences of the Bessermans and the Bartolinos are hereinafter referred to as the Residences. The Bessermans and the Bartolinos both purchased homeowners' insurance policies from Country Mutual Insurance Company (Country Mutual). Those policies included mine subsidence coverage. The Bessermans and the Bartolinos filed claims with Country Mutual (collectively the Subsidence Claims). Country Mutual had purchased mine subsidence reinsurance from the Fund. Country Mutual paid the Bessermans $163, 600.00 and paid the Bartolinos $71, 400.00 on their claim. The Fund reimbursed Country Mutual under the reinsurance policy a total of $235, 000.00 ($163, 600.00 $71, 400.00).[1]Transcript of Trial Proceedings Volume 1 (d/e 58) (T. 58), at 66-69 (Lovrak); Exhibit 199, Claims Files for Bessermans and Bartolinos, at ¶ 0002009 (Country Mutual Check to Bessermans), F0002016 (Fund approval of reimbursement to Country Mutual for payment to Bessermans), and F0002285 (Fund check to Country Mutual for reimbursement of Bartolinos' claim).[2]

         The Fund brings this action against Union Pacific as subrogee of the Subsidence Claims to recover the $235, 000 in reinsurance paid on the Subsidence Claims, plus interest and costs. First Amended Complaint (d/e 21) (Complaint), ¶ 59 and Prayer for Relief.

         Union Pacific, however, did not own or operate any coal mines. Superior Coal Company (Superior) owned and operated the mines that the Fund alleges caused the subsidence damage to the Residences and gave rise to the Subsidence Claims. Superior operated four coal mines in Macoupin County from 1904 through 1953. Superior was dissolved in 1957 (Superior Dissolution). Stipulation of Undisputed Facts (d/e 34) (Stipulation of Facts), ¶¶ 8, 42. The Fund alleges that Superior's parent corporation, the Chicago and North Western Railway Company (CNW), was liable for all the acts of Superior.

         In 1995, CNW merged into Union Pacific. Stipulation of Facts, ¶ 45.[3]Union Pacific agrees that, after the merger, it is liable for all liabilities of CNW but denies that CNW was liable for Subsidence Claims or any other claims against Superior that were not known in 1957 when Superior dissolved. See Defendant Union Pacific Railroad Company's Answer and Affirmative Defenses to the First Amended Complaint of the Illinois Mine Subsidence Insurance Fund (d/e 22) ¶¶ 14, 65; Stipulation of Facts, ¶ 45.

         The Fund and Union Pacific have previously litigated similar subsidence claims. One such case involved a subsidence at a public school building in the town of Gillespie located in Macoupin County, Illinois. Gillespie Community Unit School Dist. No. 7, Macoupin County v. Union Pacific R. Co., 2015 IL App (4th) 140877, 43 N.E.3d 1155 ( Ill. App. 4th Dist. 2015) (Gillespie). The Fund was a party plaintiff in Gillespie. Gillespie, 43 N.E.3d at 1161. The Fund claimed in Gillespie that CNW was liable for damages resulting from subsidence of Superior's mines because: (1) CNW agreed to assume all of Superior's liabilities including contingent liabilities for future subsidence claims as part of the Superior Dissolution; (2) CNW was a direct participant in Superior's business operations; or (3) CNW operated CNW and Superior as a single entity so that the two corporations were “alter egos” of each other and, therefore, the Court should “pierce the corporate veil” between Superior and its stockholder CNW, and hold CNW liable for all of Superior's debts. The third claim is referred to as the “alter ego” claim. Gillespie, 43 N.E.3d at 1172, 1179, 1180.

         The Illinois Appellate Court in Gillespie found that CNW only agreed to assume Superior's liabilities that were known at the time of the Superior Dissolution in 1957, and CNW did not agree to assume unknown, contingent liabilities such as the Subsidence Claims. Gillespie, 43 N.E.3d at 1176-79.[4] The Illinois Appellate Court further found that CNW was not liable under a theory of direct participation. Gillespie, 43 N.E.3d at 1179-80.

         The Illinois Appellate Court in Gillespie remanded the alter ego claim for further proceedings. Gillespie, 43 N.E.3d at 1162. The case was settled on remand. As a result, the alter ego claim was not fully litigated. See Opinion entered January 16, 2019 (d/e 44), at 5-7.

         In this case, the Fund realleges the alter ego claim. The Fund also alleges in the alternative that CNW assumed all of Superior's liabilities because the Superior Dissolution constituted a de facto merger of Superior into CNW. Complaint, ¶¶ 60-78. The Fund did not assert the de facto merger claim in the Gillespie case.

         The parties stipulated to a bench trial and to bifurcate the issues of liability and damages for trial. Agreed Stipulation Regarding Litigation (d/e 32). Pursuant to this stipulation, the Court bifurcated the bench trial. Minute Entry entered September 17, 2018. In this phase of the trial, the Court tried whether CNW was liable for claims against Superior that were not known at the time of the Superior Dissolution, including the Subsidence Claims, under either the Fund's alter ego claim or its alternative de facto merger claim. All other issues were reserved for subsequent proceedings.

         The Fund brought this case in 2017. The relevant events occurred between 1902 and 1957. By 2017, the individuals with personal knowledge of the relevant events were all deceased. Both parties rely exclusively on historical documents and data (Historical Record) and the opinions of experts who reviewed the Historical Record. Neither party has challenged the admissibility of the documents and data comprising the Historical Record, but both have challenged the admissibility of some or all of the testimony of the opposing party's experts. The parties also agreed to use discovery produced in other cases between the Fund and Union Pacific, including the Gillespie case.

         FINDINGS OF FACT

         I. Formation of Superior

         In the late 19th century and most of the 20th century, CNW operated railroads in the United States. Prior to 1945, most of CNW's locomotives burned coal. In 1902, CNW acquired mineral rights or fee ownership to a total of 25, 000 acres in Macoupin County, Illinois (Coal Lands). Ex. 161, Superior Coal Company Dissolution Records Compilation (Superior Dissolution Compilation), at UP-ST176060. In 1903, CNW incorporated Superior as an Illinois corporation. The Superior articles of incorporation stated the purpose of Superior:

The object of the corporation shall be to mine and sell coal, and for that purpose to acquire, own and lease such lands and to acquire and hold such coal rights, and such other real and personal estate as may be necessary.

Ex. 1, Superior Coal Company Minute Book Vol. 1 (Superior Minute Book Vol. 1), at UP-ST175661.

         CNW initially contributed $1, 500, 000.00 to capitalize Superior. In April 1904, CNW contributed an additional $500, 000.00 in capital to bring Superior's total capitalization to $2, 000, 000.00. As part of the capital contributions, CNW conveyed the Coal Lands to Superior. Superior issued 20, 000 shares of stock.[5] All shares were voting. Stipulation of Facts, ¶¶ 1-4; Ex. 1, Superior Minute Book Vol.1, at UP-ST175676-78.

         Of the 20, 000 shares, 19, 995 were owned by CNW in its own name. Each of Superior's five Directors was named as the owner of one of the five remaining shares (Directors' Shares). Illinois corporation law at the time required directors to be “bona fide shareholders.” See Gillespie, 2015 IL App (4th) 140877 ¶ 17; 43 N.E.3d at 1163. The bylaws of Superior tracked the Illinois law and also required the Directors to be “bona fide shareholders.” Ex. 1, Superior Minute Book Vol. 1, at UP-ST175666.

         CNW paid all of the capital contributions to Superior for all 20, 000 shares of stock. Stipulation of Facts ¶ 3. The initial Directors did not pay anything to anyone to purchase the Directors' Shares. The Superior Directors always voted the Directors' Shares in accord with the vote of the 19, 995 shares owned in the name of CNW. See e.g., Ex. 1, Superior Minute Book Vol. 1, at UP-ST175687. No. documentary evidence exists of any dissenting vote of a Superior Director during Superior's operations. Stipulation of Facts, ¶ 5.

         CNW reported to the Interstate Commerce Commission (ICC) that it owned all of the stock in Superior. See e.g., Ex. 4, Annual Report of CNW to the ICC for year ending June 30, 1915, at UP-ST004767; Ex. 5, Annual Report of CNW to the ICC for year ending June 30, 1916, at UP-ST0006255; Ex. 6, Annual Report of CNW to the ICC for year ending December 31, 1916, at UP-ST006396. Superior represented to the Illinois Department of Finance that CNW owned all of its stock and that the “five director's qualifying shares” were “held for the Railway Company.” Ex. 89, In the Matter of the Sales Taxes of Superior Coal Company (Illinois Department of Finance No. 156 August 6, 1935), Trial Exhibit 1, Summary of History of the Superior Coal Company and its Relations with the Chicago and North Western Railway Company (1935 History of Superior Coal and CNW), at SDSJ 161. The stockholders' consent to dissolve Superior dated September 30, 1956, also recited that CNW owned all the stock, “[A]ll of the 20, 000 share of capital stock of the Superior Coal Corporation, a corporation of the state of Illinois, are owned by Chicago and North Western Railway Company, a Wisconsin corporation, and all such shares are held in its name except for five Directors' qualifying shares.” Ex. 136, Consent to Dissolution dated September 30, 1956, at UP-ST094700; Ex. 239, accord Resolution of CNW Board of Directors dated September 30, 1956, at UP-ST197567.

         The evidence demonstrates that from the inception of Superior, CNW and the Superior Directors intended that the Directors would hold the Directors' Shares for the benefit of CNW. CNW contributed all the capital for the stock; the Directors paid nothing. The Directors of Superior were also always officers or employees of CNW. Ex. 89, 1935 History of Superior Coal and CNW, at SDSJ 162; Plaintiff's Post-Trial Brief (d/e 63), Exhibit A, Summary of Officers and Directors of Superior and CNW from 1936-55. When a Superior Director resigned, the successor Director became the owner of the share of stock previously owned by the resigning director. The resigning Director did not receive any compensation for his ownership of one of the Directors' Shares, and the new Director did not pay anything for the stock. See T. 58, at 238-40 (Hosfield). The Directors further did not receive any dividends from Superior. Stipulation of Facts, ¶ 6. When Superior was dissolved, the remaining assets were distributed to CNW only, no assets were distributed to the Directors. Stipulation of Facts, ¶ 40. The Directors always voted the five shares of stock with the 19, 995 shares that CNW owned in its own name. CNW consistently represented to the public and government agencies it owned all the stock of Superior. The Court finds that from the inception of Superior and throughout Superior's existence and its dissolution, CNW and the Directors understood that CNW would make the entire capital investment in Superior for all of the Superior stock and receive all the benefits of ownership from the stock, and the directors would hold the Directors' Shares for the benefit of CNW.

         II. Superior's General Operations and Relationship with CNW

         Once incorporated, Superior commenced mining operations. During the first 10 years of operation, Superior opened Mines 1, 2, and 3 on the Coal Lands. In 1917, Superior opened Mine No. 4 on the Coal Lands. Ex. 101, Report of Nye F. Morehouse, CNW Vice President and General Counsel dated March 12, 1953 (Morehouse 1953 Report), at UP-ST192639.

         Superior mined coal to supply CNW. Throughout its existence, Superior sold at least 95 percent of its coal production to CNW. Transcript of Trial Proceedings Volume 3 (d/e 60) (T. 60), at 666 (Schwartz); Ex. 193, Deposition of Seth Schwartz dated February 16, 2017, at 17. Superior did not incur costs associated with marketing coal; it did not need to because it existed to serve its one customer, CNW. See Ex. 103, Supplemental Report of Nye F. Morehouse dated March 26, 1953 (Morehouse 1953 Supplemental Report), at UP-ST175410.

         Over its approximately 54-year existence, Superior sold five percent of its total production to third parties. From 1905 to 1914, Superior sold 5 to 20% of sales to third parties. Beginning in 1947, Superior sold small particles of coal called screenings to third parties. CNW could not use screenings in locomotive engines. Beyond the sale of screenings, Superior sold small amounts of coal to employees for personal use. Transcript of Trial Proceedings Volume 2 (d/e 59) (T. 59), at 383-94 (Akers); T.60, at 650-51, 703-05 (Schwartz); Ex. 74, Superior Annual Report for Year Ending December 31, 1947, at UP-ST003958; Ex. 264, Expert Report of Seth Schwartz dated August 3, 2018 (Schwartz Expert Report), at CM/ECF page number 42 of 48; Ex. 75, Superior Annual Report for Year Ending December 31, 1948, at UP-ST003974; Ex. 76, Superior Annual Report for Year Ending December 31, 1949, at UP-ST003990.

         Superior's offices were located within CNW's offices in Chicago, Illinois. Superior's President reported to CNW's President. CNW's legal and accounting departments performed Superior's legal and accounting functions. Ex. 91, Collective Exhibit of Materials Filed Before the Illinois Supreme Court in Superior Coal Company v. Department of Finance, Ill. Sup. Ct. April 1941 Term No. 26166 (Supreme Court Filings), at GSD16-000140 - GSD16-000141; T. 58, at 179-81 (Hosfield); T. 60, at 569 (Hilton). Superior's corporate records, tax records, and land records were kept by CNW's secretary, land commissioner, and accountant. CNW's Insurance Department, Mechanical Department, as well as CNW's engineers and chemists, provided services to Superior. CNW's coal inspector and water supply supervisor held the same positions for Superior. T. 58, at 178-79 (Hosfield); Ex. 91, Supreme Court Filings, at GSD16-000139-140. Superior did not pay for the office space or these services. See T. 59, at 536-38 (Hilton).

         Superior's accounting books and records, however, were kept separate from the records of CNW. See T. 59, at 522-23 (Hilton). Superior also maintained all necessary formalities of a separate corporation. Superior held regular meetings of its board of directors and shareholders, kept separate corporate records and separate bylaws. Ex. 89, 1935 History of Superior Coal and CNW, at SDSJ 165 - SDSJ 167; T. 59, at 489-90, 502-05, 514, 517-18, 523-25 (Hilton). Superior and CNW issued separate annual reports. See T. 59, at 525-26 (Hilton). Superior and CNW had separate workforces and negotiated separate collective bargaining agreements with separate unions. T. 59, at 450 (Akers); T. 59, at 519-21 (Hilton). Superior paid its own bills out of its own accounts. T. 59, at 505 (Hilton). Superior kept records of its transactions with CNW on accounts payables and accounts receivables ledgers. See Ex. 251, Superior Accounts Receivable Ledger for 1935; T. 59, at 507-08 (Hilton).

         CNW and Superior executed agreements for coal sales for most years from 1919 to 1930. Thereafter, CNW and Superior entered into multi-year agreements for the sale of coal. The agreements, however, did not set prices or quantities of coal to be sold. See Ex. 264, Schwartz Expert Report, at 43 of 48; Ex. 232, Ledger of Superior Contracts; T. 60 at 636-39, 674-75 (Schwartz). In practice, CNW coal orders went through Superior President Fred Pfahler.[6] Pfahler also worked for CNW as its Coal Traffic Manager. The general manager of CNW would notify Pfahler weekly of the quantities of coal needed and the locations for delivery. Pfahler prepared monthly “tonnage statements” in which he would estimate the price of the coal delivered for the month equal to the cash needed to meet ongoing expenses, or the cost of operating. Ex. 91, Supreme Court Filings, at GSD16-000134 - GSD16-000135. See Ex. 93, Superior Coal I, Record on Appeal to the Illinois Supreme Court (Superior Coal I Record on Appeal), at GSD6000078 - GSD600079, GSD6000083, GSD6000105 - GSD6000108, GSD000115 (Testimony of Fred Pfahler before Department of Finance Hearing Examiner), and GSD6000240 (Letter from CNW General Purchasing Agent to Pfahler dated June 7, 1937 ordering coal for June 17, 1937); Ex. 109, CNW Finance Committee Minutes dated May 14, 1954, at UP-ST031831.

         CNW secured coal from Superior for less than it would have paid to third-party suppliers. Superior generally sold coal to CNW at cost or slightly above cost. CNW also reduced its shipping costs by extending its rail lines to Superior's mines and thereby avoiding third-party shipping costs. Ex. 89, 1935 History of Superior Coal and CNW, at SDSJ 164, SDSJ 170. Ex. 103, Morehouse 1953 Supplemental Report, at UP-ST175410, UP-ST175411; Ex. 87, Memorandum of Agreement between CNW and Superior dated December 27, 1934 (1934 Agreement), at UP-ST003297 - UP-ST003300; Ex. 91, Supreme Court Filings, at GSD16-000134 - GSD16-000135; T. 59, at 426-27 (Akers); T. 60, at 646-47, 700-01 (Schwartz). CNW estimated that it paid $.73 per ton below the commercial price of coal during the eight months ending August 31, 1936. Ex. 103, Morehouse 1953 Supplemental Report, at US-ST175410; see Ex. 83, Agreement between Superior and CNW dated July 22, 1932 (1932 Agreement), at UP-ST024731 (Superior sold CNW coal “at a price lower than the railway company can purchase the same grade of coal elsewhere.”). But see, T. 59, at 404-14 (Akers) (Superior charged more than cost from 1919 to 1925 to fund capital investments); Ex. 83, 1932 Agreement and Ex. 87, 1934 Agreement, (Per these agreements, discussed in detail below, Superior charged $.20 per ton over cost from July 1932 to December 1934); T. 60, at 642 (Schwartz) (Superior charged more than cost of production from 1942 through 1953).

         Superior showed a net profit over its 50 plus years of existence. CNW's expert Seth Schwartz opined that over the course of its existence, Superior had total revenues of $221, 757, 257.00 and net income of $16, 212, 556.00, for a profit margin of 7.3%. Ex. 197, Expert Report of Seth Schwartz dated August 3, 2018, Appendix B, Supplemental Disclosure Statement of Set Schwartz Exhibit E Superior Coal Company Financial Results. CNW's other expert Thomas Hilton opined that from 1926 to 1954, Superior had gross income of $147, 742, 602.96, and operating income from 1926 to 1954 to be $15, 370, 022.13, or 10.4% of total revenues. Hilton deducted tax accruals and other losses and special expenses from operating income to calculate net income. Hilton opined that Superior had net income from 1926 to 1954 of $6, 825, 345.00, for a profit margin of approximately 4.6%. Ex. 266, Supplemental Expert Report of Thomas E. Hilton, dated September 10, 2018, at 4-27 - 4-29; see T. 60, at 597-98. After review of the calculations, the Court finds Hilton's calculations of net income are more accurate. Schwartz' calculations appear comparable to Hilton's calculation of operating income, not net income.

         The Fund argues that Superior always sold coal at cost to CNW, and so, did not earn a profit from those sales. The evidence does not support such a finding. The Court agrees that some of Superior's profits may have come from sales to third parties. Also, some of the profit reflected money CNW funneled through Superior to pay CNW's creditors. Some of the profit reflected inaccuracies in estimates of costs of production during the ordering and billing process between Pfahler and the CNW General Manager. See T. 58, at 100, 136 (Hosfield).[7] Even so, the 4.6% profit margin cannot be explained away completely by these factors. The evidence shows that Superior made a net profit from the sale of coal to CNW over the entirety of its existence.

         From 1911 to 1952, Superior declared $14, 725, 000.00 in dividends, all of which were payable to CNW. The parties have stipulated that these dividends were paid out of profits. Stipulation of Facts ¶ 13. Superior declared dividends 23 times during this period. Six times the dividends were $1, 000, 000.00 or more. In light of Hilton's calculations of Superior's net income, the $14, 725, 000 in dividends exceeded Superior's net income of $6, 825, 445.50. At least some of these additional dividends were “paid” by accounting adjustments on each company's balance sheets. As discussed in detail below, Superior's largest dividend of $2, 150, 000.00 to CNW in 1930 consisted of adjustments to the two companies' balance sheets rather than payments to CNW. Ex. 103, Morehouse 1953 Supplemental Report, at UP-ST175415.

         Up until 1953, when Superior began closing its operations, Superior remained solvent regardless of price charged or dividends distributed to CNW. Hilton opined that from 1926 to 1953 Superior consistently generated enough income to fund its operations. Ex. 266, Supplemental Expert Report of Thomas E. Hilton, dated September 10, 2018, at 4-5 ¶ 9(a); T. 59, at 496-97, 499 (Hilton). Hosfield and Akers agreed with this opinion. T 59, at 339 (Hosfield); T. 59, at 448, 476 (Akers). Akers further agreed that Superior did not lack sufficient capital to perform its functions and meet its debts. T. 59, at 448 (Akers); see also T. 59, at 496-97 (Hilton) (Superior was adequately capitalized and made capital improvements “on a regular and continuous basis.”). The Court finds these opinions to be credible. The Fund cites no evidence that Superior was ever unable to pay its bills. Even after Superior started closing operations in 1953, Superior still paid all known creditors or provided reserves to pay them.[8]

         The Fund argues that Superior could only pay its bills because CNW provided enough money on an ongoing basis to pay Superior's bills. See Ex. 91, Supreme Court Filings, at GSD16-000134 - GSD16-000135; T. 59, at 478 (Akers). That observation does not show that Superior was insolvent. Rather, that observation shows that CNW ensured that Superior had the assets and income necessary to pay its debts The Court finds that Superior was solvent and able to pay its bills as they became due at least until it started the process of closing down its operations in 1953. The Court further finds that after Superior began closing operations, Superior still paid its known creditors or provided reserves to pay its known creditors.

         III. Financial Transactions Between Superior and CNW

         Unlike Superior, however, CNW had serious financial problems during the Great Depression in the 1930s. CNW ultimately filed bankruptcy in 1935. In the 1920s and early 1930s, Superior and CNW engaged in several financial transactions to improve CNW's financial condition. In 1925, Superior purchased 700 preferred shares and 1, 600 common shares of another CNW controlled company, the Chicago, St. Paul, Minneapolis, and Omaha Railway Company. Superior then deposited the stock with the Central Union Trust Company of New York (Central Union Trust) pursuant to an agreement between CNW and Central Union Trust. Ex. 1, Superior Minute Book Vol. 1, at UP-ST175802 - UP-ST175803. No. evidence indicates that Superior received a direct benefit from this transaction.

         In 1930, Superior declared a $2, 150, 000.00 dividend which increased CNW's net worth by approximately $1, 800, 000.00 and decreased Superior's net worth by the same amount. At the beginning of 1930, CNW owed Superior $1, 064, 421.62 for unpaid coal sales, plus additional debts of $550, 000.00, for a total debt of $1, 614, 421.62. Ex. 57, Superior Annual Report for Year Ending December 31, 1930 (Superior 1930 Annual Report), at UP-ST004075. In 1930, Superior declared the $2, 150, 000.00 dividend payable to CNW as its stockholder. Ex. 103, Morehouse 1953 Supplemental Report, at UP-ST175415. The $2, 150, 000.00 dividend exceeded the combination of Superior's net income in 1929 and 1930 and its cash assets at the beginning and at the end of 1930. Ex. 57, Superior 1930 Annual Report, at UP-ST00474.

         Superior paid the $2, 150, 000.00 dividend to CNW by off-setting CNW's outstanding $1.6 million debt and by borrowing approximately $550, 000.00 from CNW. At least $1, 000, 000.00 of these dividends were credited to an intercompany account of CNW. Ex. 191, Deposition of Thomas Hilton (Hilton Deposition), at 22-24; T 60, at 586-87 (Hilton). An intercompany account is used to track transactions between companies under common control. T. 60, at 590 (Hilton). At the end of 1930, CNW owed Superior $371, 034.55 in unpaid coal sales, but Superior owed CNW $553, 303.17 largely from the loan used to fund the dividend transaction, resulting in Superior owing a net debt of $182, 268.62 to CNW. Ex. 57, Superior 1930 Annual Report, at UP-ST00474. As a result of these transactions, CNW's net worth increased by approximately $1, 800, 000.00 because it no longer owed Superior $1.6 million and Superior now owed it approximately $180, 000.00. Conversely, Superior's net worth decreased by approximately $1, 800, 000.00 because CNW no longer owed it $1.6 million and it now owed CNW approximately $180, 000.00. See T. 59, at 417-20 (Akers); T. 60, at 590-92 (Hilton).

         In 1932, CNW had a net operating deficit of $11, 216, 820.37. Ex. 23, CNW Annual Report for year ending December 31, 1932 (1932 CNW Annual Report), at UP-ST078565. CNW began borrowing large amounts of funds from the federal government's Great Depression Era Reconstruction Finance Corporation (RFC Loan). The RFC Loan required CNW to make quarterly payments of $100, 000.00, totaling $400, 000.00 per year. On July 22, 1932, CNW contracted with Superior (1932 Agreement) to make the quarterly payments on the RFC Loan. Under the 1932 Agreement, CNW agreed to purchase at least 2, 000, 000 tons of coal annually at a price of 20 cents ($.20) per ton over cost of production. The price resulted $400, 000.00 in annual income to Superior over the cost of production. Superior agreed to issue dividends of $400, 000.00 annually ($100, 000.00 each quarter). CNW assigned its rights to the dividends to the Reconstruction Finance Corporation to satisfy the quarterly payments due on the RFC Loan. Ex. 83, 1932 Agreement, at UP-ST024731, UP-ST024733; See Ex. 87, 1934 Agreement, at UP-ST003297 - UP-ST003298.

         On April 11, 1932, Superior deposited $50, 000.00 with CNW “to be held and used for and on account of the Superior Coal Company.” Ex. 1, Superior Minute Book, Vol. 1, at 175880. On December 28, 1932, $19, 500.00 remained from the $50, 000.00 that Superior deposited with CNW in April of that year. Neither party presented evidence of how the $30, 500.00, from the initial $50, 000.00 deposit, was spent. Superior used the remaining $19, 500.00 to purchase debentures issued by CNW in 1933 (1933 Debentures), effectively loaning the money to CNW. The Superior Board of Directors authorized CNW's treasurer to purchase the 1933 Debentures. Ex. 1, Superior Minute Book Vol. 1, at UP-ST175890.

         In 1933, CNW's financial problems continued, and Superior continued to assist CNW. In 1933, CNW had a net operating deficit of $7, 875, 418.69. 1932 CNW Annual Report, at UP-ST078629. CNW had approximately $6.3 million in 1933 Debentures that came due on May 1, 1933, and approximately $7.7 million mortgage bonds issued in the name of a CNW subsidiary, the Fremont, Elkhorn, and Missouri Valley Railroad Company (Fremont Bonds), that came due on October 1, 1933. CNW could not pay the principal balance at maturity or refinance either the 1933 Debentures or the Fremont Bonds. CNW offered the bond and debenture holders 50% of redemption value in cash and 50% in CNW general mortgage bonds. CNW borrowed the money from the Reconstruction Finance Corporation to fund the 50% cash payout. By the end of 1933, the principal balance of the RFC Loan increased to $15, 441, 200.00. Ex. 24, CNW Annual Report for the Year Ending December 31, 1933, at UP-ST078630 - UP-ST078631.

         Superior owned $37, 000.00 of the 1933 Debentures. Superior's Board of Directors voted to accept the refinancing of 50% in cash and 50% in CNW mortgage bonds. The records from Superior's Board of Directors state that CNW agreed to pay a 10% cash advance upon surrender of the debentures. Superior directed the treasurer of CNW to retain the 10% cash advance and to buy more 1933 Debentures with the funds. Ex.1, Superior Minute Book Vol. 1, at UP-ST175891 - UP-ST17589. Buying more of the 1933 Debentures further reduced CNW's debt owed to third parties not owned by CNW.

         In addition, in June 1933 Superior purchased $350, 000.00 in Fremont Bonds and accepted the CNW refinancing proposal. Superior again authorized the CNW treasurer to keep the 10% advance cash payment to buy more Fremont Bonds. In September 1933, Superior purchased additional Fremont Bonds. Superior again directed CNW's treasurer to retain the 10% cash advance from the Fremont Bond refinance to buy more Fremont Bonds. Id. at UP-ST175897 - UP-ST 175899, UP-ST175902 - UP-ST175907. Again, Superior thereby reduced CNW's debt to parties not owned by CNW.

         In 1934, CNW had net operating deficit of $8, 276, 193.80. Ex. 25, CNW Annual Report for the year ending December 31, 1935 (1935 CNW Annual Report), at UP-ST078692. On or about May 1, 1934, CNW borrowed up to $250, 000.00 on a short-term loan from Chase National Bank and National City Bank, both of New York City (Bank Loan). The two banks demanded mortgage bonds issued by CNW with a $500, 000.00 par value as collateral for the $250, 000.00 loan. Superior owned $500, 000 par value CNW general mortgage bonds. Superior pledged its bonds as collateral for the Bank Loan to CNW. By August 1935, CNW had repaid the Bank Loan and the two banks had returned the bonds to Superior. See Ex. 89, 1935 History of Superior Coal and CNW, at SDSJ 168 - SDSJ 169; Ex. 1, Superior Minute Book Vol 1., at UP-ST175914 - PU-ST175915.

         Also, in 1934, CNW refinanced approximately $4.5 million in bonds that matured January 1, 1935 (1934 Bonds). CNW again offered 50% in cash (again borrowed from the Reconstruction Finance Corporation), and 50% in long-term mortgage bonds. Ex. 25, 1935 CNW Annual Report, UP-ST078694. Superior again owned some of the 1934 Bonds. On October 31, 1934, Superior accepted the refinancing terms and authorized the cash from the refinancing to be used to purchase additional 1934 Bonds, again reducing CNW's debt to parties not owned by CNW. Ex. 1, Superior Minute Book, Vol.1, at UP-ST175923 - UP-ST175924.

         In December 1934, the Reconstruction Finance Corporation agreed to waive CNW's obligation to make five quarterly payments on the RFC Loan due December 31, 1934 through December 31, 1935. Superior agreed to stop charging CNW $.20 per ton over the cost of production for coal and CNW agreed to relieve Superior of the obligation to declare the $400, 000.00 annual dividend. Superior further agreed to sell coal to CNW at cost from October 1, 1934 to December 31, 1935. Ex. 87, 1934 Agreement, at UP-ST003300; see Ex. 89, History of Superior Coal and CNW, at SDSJ 169 - SDSJ 170.[9]

         On June 27, 1935, CNW officially decided to default on bonds totaling $29, 464, 891.50 in principal and interest set to mature on December 31, 1935. The next day, June 28, 1935, CNW filed bankruptcy. A court-appointed trustee took over CNW's property and operations. CNW had a net operating deficit in 1935 of $11, 070, 348.25. Ex. 26, CNW Annual Report for the year ending December 31, 1935 (1935 CNW Annual Report), at UP-ST078755, UP-ST078756. CNW remained in bankruptcy until 1944.

         IV. The Sales Tax Dispute

         In 1935, Superior had a dispute with the Illinois Department of Finance over whether Superior owed Retailers' Occupation Tax (Sales Tax) on coal sales to CNW. The Department of Finance sought Sales Taxes on coal sales from July 1933 to May 1935. Stipulation of Facts ¶ 16. Superior took the position that its coal sales to CNW were not subject to Sales Taxes because Superior was a department of CNW and not really a separate corporation, “At all times since its organization, the Superior Coal Company has been under the complete domination and control of the Railway Company as a mere branch or department of the Railway Company's business.” Ex. 89, History of Superior Coal and CNW, at SDSJ 164. According to Superior's court filings during the Sales Tax dispute, the “sales” of coal were really intradepartmental transfers within CNW, not sales subject to Sales Tax. Ex. 91, Supreme Court Filings, at GSD16-000133 - GSD16-000135. Superior further asserted in court filings that:

The Coal Company is without funds except as supplied by the Railway Company for coal; the ”price” of coal is fixed by the unilateral determination of the Railway Company management; nominal Coal Company officers are subordinate to the railroad executive officers; and under the routine observed the so-called “sales” are handled as interdepartmental transactions except for the employment of certain of the formal indicia of sales.

Ex. 91, Supreme Court Filings, at GSD16-000133.

         CNW and Superior also memorialized the description of Superior as a department of CNW in the 1934 Agreement:

WHEREAS, for many years said Coal Company has, although constituting a separate corporation, been managed and operated, and its properties managed and operated, as a branch or department of said Railway Company, and wholly in in its interest; . . . .

Ex. 87, 1934 Agreement, at UP-ST003297.

         The Sales Tax dispute went through the administrative process and judicial review until it reached the Illinois Supreme Court. The Illinois Supreme Court issued its decision in 1941. Superior Coal Co. v. Department of Finance, 377 Ill. 282, 36 N.E.2d 354 (Ill. 1941) (Superior Coal I). The Supreme Court stated that a corporation cannot assert the equitable alter ego doctrine to pierce its own the corporate veil to avoid liability for taxes. The Supreme Court found that, for tax purposes, Superior was a separate corporation from CNW, and so, had to pay Sales Tax on coal sales to CNW. Superior Coal I, 377 Ill. at 294-95, 36 N.E.2d at 360.

         V. Superior's Final Years

         On June 1, 1944, CNW emerged from bankruptcy. Ex. 35, CNW Annual Report for the Year Ending December 31, 1944, at UP-ST029150; see Ex. 103, Morehouse 1953 Supplemental Report, at UP-ST175415; T. 59, at 424 (Akers). On July 28, 1944, Superior agreed to exchange $637, 500.00 in CNW general mortgage bonds for “new securities provided for in the Plan of Reorganization of Chicago and North Western Railway Company.” Ex. 1, Superior Minute Book Vol. 1, at UP-ST716024.

         Superior did not pay any dividends to CNW from 1935 to 1945 including the time that CNW was in bankruptcy. In 1946 and 1949, Superior paid dividends of $1, 500, 000.00 and $1, 150, 000.00, respectively. Ex. 103, Morehouse 1953 Supplemental Report, at UP-ST175415 - UP-ST175416.

         In the late 1940s, CNW converted its railroad operations from coal-fired locomotives to diesel-powered locomotives. Beginning in 1947, CNW no longer needed coal to fuel its locomotives. CNW's demand for coal from Superior dropped from 463, 000 tons in 1947 to 86, 000 tons in 1953. Ex. 103, Morehouse 1953 Supplemental Report, at UP-ST175411; see Stipulated Facts, ¶ 10.

         In 1947, Superior started selling coal commercially to third parties. From 1947 to 1952, Superior sold fine pieces of coal called screenings to third parties. During this period, Superior had annual net revenues of $161, 000.00 from sales of screenings. Ex. 101, Morehouse 1953 Report, at UP-ST192640.

         On May 7, 1951, Superior abandoned Mine No. 1 as no longer economically viable. Superior commenced salvage operations to dispose of equipment and supplies related to the operation of Mine No. 1. Ex. 2, Superior Minute Book Vol. 2, at UP-ST191889 - UP-ST191890.

         On March 12, 1953, Nye Morehouse, Vice President of Superior and Vice-President and General Counsel of CNW, wrote the Morehouse 1953 Report. Morehouse stated that Superior had 18, 881 acres of virgin coal reserves with a recoverable coal estimate of 117, 076, 407 tons. Ex. 101, Morehouse 1953 Report, at UP-ST192639. According to Morehouse, Pfahler estimated the going concerns value of 18, 881 acres of virgin coal rights to be $50 an acre. Morehouse reported that the estimated market value of Superior's 1, 100 acres of the Coal Lands held in fee ownership not to be in excess of $1, 000, 000.00. Morehouse said that these estimates assumed a buyer interested in purchasing Superior as a going concern. Morehouse said that the liquidation or salvage value of the Coal Lands would be far less. Ex. 101, Morehouse 1953 Report, at UP-ST192642. Morehouse estimated the value ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.